24 January 1990 Ministerial Letter 58738 F - Canada-U.S. Income Tax Convention - Distribution of Partnership Assets

January 24, 1990

Dear Sirs:

This is in reply to your letter of September 1, 1989 wherein you requested our opinion concerning paragraph 8 of Article XIII of the Canada-U.S. Income Tax Convention (1980)(the "Convention").

Your letter stated that you are concerned with a situation where a U.S. partnership distributes its assets to its partners, one or more (but not the majority) of whom are Canadian partners.  Under U.S. law the transaction is a tax deferred transaction whereas under Canadian tax law the partnership is deemed to have disposed of the properties at fair market value.  The resultant deemed gain of the partnership is allocated to the partners and to the extent that any of the partners are Canadian residents, such capital gains must be reported in the taxation year the gain is realized.

You indicated that paragraph 8 of Article XIII of the Canada-U.S. Income Tax Convention (the "Convention") provides that where a resident of a Contracting State alienates property in the course of a corporate organization, reorganization, etc., the profit, gain or income in respect of such alienation may be deferred in order to avoid double taxation.  You have requested our opinion whether paragraph 8 of Article XIII of the Convention could apply to the example set out in the previous paragraph when a partnership alienates property in the course of a transaction similar to a corporate reorganization.

It is our position that while a partnership may qualify as a person for the purposes of the Convention, it does not qualify as a resident of a Contracting State within the definition in paragraph 1 of Article IV of the Convention because it is the partners and not the partnership which is liable to tax.  As the partnership does not qualify as a resident of a Contracting State, paragraph 8 of Article XIII of the Convention would have no application.  In addition, since paragraph 8 is specifically limited to an organization, reorganization, amalgamation, division or similar transaction of a corporation we cannot extend the meaning of those words so that it will apply to reorganization etc. by a partnership.  Accordingly, paragraph 8 would have no application at the partnership level or the partners.

In summary, it is our view that the deferral permitted under paragraph 8 of Article XIII of the Convention could not apply to a partnership organization, reorganization etc.  We trust this is adequate for your purposes.

Yours truly.

for DirectorReorganizations and Non-Resident DivisionSpecialty Rulings DirectorateLegislative and Intergovernmental Affairs Branch